The bipartisan movement to break up America’s biggest banks and end the Too Big To Fail phenomenon has slowly, glacially gained momentum. Financial reform represents a classic public choice issue where the benefits of the status quo are concentrated and current — an ongoing federal safety net for a few major and politically powerful financial institutions — and the costs are diffuse and distant — the heightened risk of another financial crisis and future taxpayer bailouts. But the ball continues to move forward.
The argument for breaking up megabanks, restructuring them, or capping their size is this: Bigness plus bailouts have created what British bank regulator Andrew Haldane calls a “self-perpetuating doom loop.” The industry is so large, concentrated, and complex that the failure of any institution could create financial instability and thus major players receive an implicit government guarantee of their debt (a guarantee reinforced by the banks’ extraordinary political influence). The incentive, then, is to become even bigger and more complicated, raising the risk of financial crisis and further taxpayer bailouts.
The counterargument is ably and gamely expressed in a new report from Hamilton Place Strategies, the rising policy and communications consulting firm whose partners include my friend and fellow CNBC contributor Tony Fratto, the former US Treasury Department and Bush White House spokesman. Here are the key points from “Banking On Our Future: The Value Of Big Banks In A Global Economy”: